Your son qualifies for the AOTC as he was still in school. You get to pay tax on 529 earnings but there is no penalty. The penalty is waived when it is taxable due to claiming the AOTC.
You mentioned he had his own unrelated 529 withdrawal that was non-qualified.
Important: He cannot use the same $4,000 "penalty-free" exception that you are using. The exception follows the expenses. Since you are using that $4,000 of tuition to justify the AOTC and "protect" your withdrawal from the penalty, he must have other qualified expenses or a different exception (like a scholarship) to avoid the penalty on his own withdrawal.
If his withdrawal was truly for non-educational purposes and he has no other expenses, he correctly paid the tax and the 10% penalty on his return.
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
